Recently, the EU has found itself in a precarious position, given the supranational and national law systems overlapping with each other and creating tax loopholes. A position the EU wants to do away with, as demonstrated by its last anti-tax avoidance initiative. Only, is a simple application of a fair profit distribution dogma really the answer to the tax avoidance problem?

To end the scourge of tax avoidance, the EU commission re-launched in October 2016 its proposal to create a corporation tax regime common for all EU members – The Common Consolidated Corporate Tax Base (CCCTB). This initiative is in the mainstream of global politics, since a number of measures targeting tax avoidance have been proposed and adopted on the international scale with the support of the OECD, the G20 and the national levels.

The new legislation is aimed at the largest corporations in the EU (with an annual turnover exceeding €750 million). The primary goal of the CCCTB is not to introduce a single tax rate within the EU, but rather to establish a single set of rules to calculate a company taxable base. The reason being that existing regulations, as they are now, vary from country to country, which creates ambiguity and tax loopholes. As for the second objective of the new legislation, it aims to promote a system of corporate taxation, according to which business profits are taxed in the jurisdiction where value is actually created. Hence, this new legal framework is expected to ensure a just, transparent and overarching corporate tax regime, which is more likely to boost investment in R&D.

Though the EU initiative may seem progressive, it still entails a degree of risk, in the sense that it can have a negative effect on the Member States’ economic performance.

Unfortunately, the tax avoidance practice has become so common and so entrenched in the EU financial system, that its immediate prohibition could cause a major disruption. One concern would be a drastic upset of the cost/benefit balance of multinationals. As a result, given that the business is no longer profitable, TNCs may vote by their feet, curbing their activity and moving to another continent where they would be offered more benefits. It would lead to a huge number of workplaces being shut down as well as a reduction of investments in Europe.

Another one is the fact that it may contradict the interests of some EU members, who capitalize on their less harsh corporate tax legislation. Though the main opponent of the policy against tax avoidance, the UK, is due to leave the EU, there is a range of continental countries that position themselves as Offshore Centers. According to the Financial Secrecy Index 2015, Luxembourg and Germany were ranked among the top 10 tax havens given their secrecy and the scale of their offshore financial activities. The profound implications of multinationals’ activity in European countries are also well illustrated by the Irish case. Once Ireland, hosting the headquarters of Google and Facebook, stunned the world with its 26% economic growth. The second time was because the Irish financial minister refused a huge cash windfall from Apple, showing that he was not eager to collect the $14.5 billion the company owes.

To have the cake and eat it too: is it possible to keep tax avoidance in check without hindering European economy?

The answer is yes, if the initiative takes into consideration three conditions. First of all, there’s no need to rush things. Both the state economy, as well as cross-border corporations have to adjust steadily to new rules. Secondly, legalism is not a cure-all. To achieve economic stability, the authorities sometimes have to develop a sort of partnership with businesses, which sometimes transcends the institutional framework. Of course, in no way does it mean that the government should be biased in favour of particular corporations. An example of that would be Russia. To curb the outflow of capital, the Russian government passed in 2014 an anti-offshore bill. It implied tax amnesty for those who possess undeclared foreign assets and accounts, once they declare them to the Russian authorities. During the program, which ended this summer, a good number of Russian companies began pulling their assets from Offshore Centers. For instance, the country registered an increase of 43% of influx of capital from Bahamas offshore jurisdictions, reaching $5.2 billion, a clear sign of success.

The third point, and the most effective, would be to consider the issue of tax evasion within the EU in a broader context, which means a global answer to the offshore problem. Such a response amounts to the creation of a global regime, where each state has equal responsibilities and which leaves no room to free riders. Though, for sure, such a system will not appear overnight, states signing the Standard for Automatic Exchange of Financial Account Information in Tax Matters, at least, have already started to enforce a more transparent regime.

As such, if the EU, and the world, want to end tax avoidance, a global solution involving all states appears to be unavoidable. What remains to be seen, however, is how multinationals will navigate in a world where there’s no “safe harbour” to anchor in.